Western Areas well-placed in weak market: brokers

Macquarie recently highlighted that
Western Areas
is the only ASX-listed nickel producer generating meaningful cash flow at current nickel prices.

It is also of the view that the company is well-positioned to ride out a sustained period of weak nickel prices while maintaining strong optionality to long-term price strength.

And, according to a report released by Bell Potter on Wednesday which incorporated a 29 per cent upgrade in 2013-14 earnings estimates, this return to strong pricing may not be far away and should have a significant impact on profitability in 2014-15.

Commenting after Western Areas delivered impressive nickel production for the September quarter, the broker highlighted that nickel prices should recover as high-cost suppliers have to exit the market, effectively pushing up commodity prices.

In the interim, Bell Potter said Western Areas’ high-grade, low-cost nickel sulphide concentrate product would be profitable through the cycle, with its low-impurity concentrate strategically important to off-take customers such as BHP Billiton and Jinchuan Group.

In terms of Western Areas’ immediate performance, the key feature of its September quarter production was a 14 per cent quarter-on-quarter reduction in costs, achieved through im­proved efficiencies – and, importantly, high nickel grades. Bell Potter said this level of production and cost performance was well ahead of the company’s 2013-14 budget and market guidance.

Macquarie has an outperform recommendation on Western Areas, with a 12-month share price target of $3.90, about 10 per cent ahead of Bell Potter’s target price of $3.50.